Question

Why is it important for you, a non-accountant, to be able to interpret and analyze the financial statements that have been prepared by a company's accountants?
As useful as financial statements are, they have their limitations. Of course, we should be aware of such limitations whenever we are analyzing a company's financial statements. What do you see as the shortcomings/limitations of corporate financial statements?

Answer 1

Even non- finance & accounting persons need to have a knowledge about how to analyse & intrepret the financial informations contained in a company's financials for the period --- Various persons need this knowledge for various reasons as the following reasons:

1. For an investor,who has invested in the company, study the financial welfare of the company --so as to assess the safety,security & profitability of his investments.

2. To ensure that his periodic returns will be maintained --as also repayment certainty.

3.. For potential investors, to decide whether or not to invest their hard-earned money, in that company-- to assess the future performance.

4.. For government authorities,to assess that the dues to the government & various state and federal authorities are paid on time & accurate in measurement.

5.. For the lender , to know if his principal& interests are safe.

6..For all satkeholders connected with the company, that the company is doing business on ethical lines & in a socially responsible manner.

7.. Last but not the least, for the employees , to be sure about his job and salary and other dues from the company and also take pride in being associated with the company.

Shortcomings/limitations of corporate financial statements

The above analysis lends value to the analyst,subject to or after having duly considered certain important points about the characteristics of the financial informations, contained in a company's financials.:

1. Mainly they are based on historical figures , ie. At purchase costs , not the prevailing ones.

2. All figures pertain to one accounting period only & to establish any trend, quite a number of such statements need to be studied.

3. Similarly, a number of other peer-companies need to be analysed ---giving weightage to the fact of different accounting practices , prevelant in each of them.

4.. Figures pertaining to long-term assets & long-term liabilities ,need to be adjusted for inflationary trends ,to give any meaningful inference.

5.. Non-financial issues like employee welfare schemes may go un-noticed.

6.. Figures might have been the result of many window-dressings & modifications ---not readily discernible.

So, a person analysing the financial statements ,must take adequate care to consider the above points, before intrepreting & coming to a conclusion or forming an opinion.